July 05--CONCORD -- State government concluded the first half of its two-year budget with revenues $26.6 million short of the target, officials for Gov. John Lynch confirmed Tuesday.

But the picture improves and New Hampshire will more than meet its revenue forecast if the state's acute care hospitals make $34.1 million in payments still owed under a state Medicaid Enhancement Tax.

If hospitals wind up paying all their MET taxes, revenues will come in $7.5 million over legislative estimates for the year. Lynch and legislative leaders have maintained for several months the hospital tax money would come in after the Obama administration advised it was legal for the state to collect it.

Hospital executives appealed those MET tax payments last summer after lawmakers passed the budget that cut state aid to hospitals by more than $220 million over a two-year period.

For the year, state taxes and fees brought in nearly $2.2 billion.

The state's two main taxes paid by business owners brought in $513 million, or $10 million more than expected.

Taxes from the sale of cigarettes for the year took in $212 million, or $20.1 million less than last year. The tobacco tax return was $11.5 million short of what legislative budget writers had forecast for this year.

Last year, the Legislature for the first time in history cut that tax by 10 cents a pack.

Critics insisted it would cause revenues to go down, while supporters maintained the tax cut would increase revenue as more out-of-state tourists bought cigarettes.

Administrative Services Commissioner Linda Hodgdon said the cigarette tax cut accounted for a $12 million loss in revenue.

In June, all taxes and fees produced $207 million, $2.1 million more than expected.

The new fiscal year began Sunday, July 1.

Though the current two-year budget is balanced by June 30, 2013, the spending plan this first year would end with a $14 million deficit.

The actual end-of-the-budget outlook will not be finalized until September after auditors review the state's books.

Lynch said he would use an $11 million net surplus from 2011 to help erase that potential deficit.

House Speaker William O'Brien, R-Mont Vernon, wanted to put that amount of cash into the state's Rainy Day Fund, but the Republican-led Senate killed legislation to accomplish that.

Sen. Lou D'Allesandro, R-Manchester, said the state faces greater challenges in the second year of the budget.

New Hampshire is required to repay the Obama administration $9 million as part of a larger penalty against the state stemming from a 2002 federal audit of Medicaid reimbursements.

The budget presumes at least $16 million in savings by converting Medicaid health insurance to a managed care program.

Legislative leaders now concede the savings are likely to be much smaller than that amount because the program is delayed and won't start until January.

"We'll also fully realize the impact of the cuts in spending and the loss in revenues that came about from this budget," D'Allesandro said. "If this year was tough, next year is going to be even tougher."

Kevin Landrigan can reached at 321-7040 or klandrigan@nashuatelegraph.com.

Also, follow Landrigan on Twitter (@Klandrigan).

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